Value Investing: The Story of Coca-Cola
Disclaimer: Your capital is at risk. This is not investment advice.
My Journey in Finance;
Having covered momentum in the last series, I now look to value. It is a subject that becomes increasingly important with experience because it is the only strategy that lasts the test of time. I will outline value through the lens of the Coca-Cola (KO) share price since the 1960s.
Value investing seeks out situations that are trading below their intrinsic value. For the corporate raider, that could be valuable assets such as property, securities, plant and machinery, or even intellectual property. More often, it is an upbeat view of the company’s growth prospects, using reasonable assumptions. Value might also be found in a bond with a more attractive yield or a commodity trading below a level it might reasonably be expected to. Provided the value investor does the research and has the skills and patience, they routinely make money, albeit with the occasional hiccup.
Value is a robust investment strategy. It may not get all the glory, like high growth stocks, but if well-implemented, it is a reliable source of market-beating returns that can be generated in a wide range of market conditions. Buying something that is undervalued is a basic and sound investment principle, one that should never be ignored. By the same line of reasoning, any investment that is not expected to deliver value should be avoided.
Buffett once said that investors who distinguish between growth and value are confused.
“Investment managers who glibly refer to Growth and Value styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component - usually a plus, sometimes a minus - in the value equation.”
He meant that you could compare fast and slow-growing companies, but the valuation method for both companies should be the same. The growing company could be underpriced, and the slow-growth company overpriced, or it could be the other way around. A company’s intrinsic value is determined by the present value of its future cashflows or its breakup value. If the market price is below intrinsic value, you should buy. If it isn’t, find something else that is.
Yet it is common parlance in markets to use the terms growth and value, referring to fast and slow-growth companies, which is entirely reasonable. I also use the term Value to describe asset-heavy companies in the Money Map, but I probably shouldn’t (I may switch to cyclicals). Most investors count companies with sales and earnings growing above (say) 10% per annum as growth stocks, with everything else being dismissed as value. As I said, parlance rather than science, but we know what it means.
Skilled value investors are more precise, and when they identify value, they see a situation offered at a price below its intrinsic value, with a margin of safety to boot. The idea is the market will eventually see what they see and revalue accordingly.
Some situations can take a long time to reward investors, especially when a company or an industry is undergoing a major change. Sometimes, it can be quick, such as the bid for Keywords Studios, which came six days after my note in ByteTree Venture, returning 73%. There are also value traps, which are companies that are dying slowly, which might not be obvious at the time. A good example would be Blockbuster Video in its latter years, which was cash-generative but never cheap for the simple reason that its intrinsic value was heading for zero.
KO is a well-known company with a rich history. Unlike many companies from the 19th century, today, it still does roughly what it did back then, so it is useful as a case study for long-term valuation.
